I hope that you, your families, your friends and your colleagues are staying safe and aren't going crazy in isolation. I live in Northern California and (gah!) am in the over-60 demographic, so I've been sheltering in place for days. The good news is that, without sports on in the background, I'm being wildly productive.
As I have searched for an analogue that would help me get my head around the global pandemic and its two-by-four to the face of the economy, it has occurred to me that I have a fairly good one. I was the bureau chief for the Wall Street Journal in Mexico City during the peso devaluation crisis that began in late 1994. So I watched, up close and personal, a crisis that threatened to not only take down the Mexican economy but also spread to the rest of Latin America and eventually to throw the U.S. into a recession.
Now, I realize that what my colleagues and I covered was a financial crisis, not a medical one, and that my degrees are in journalism, not in medicine, public health or economics. But I still think some aspects of the peso crisis match what's been happening in the coronavirus crisis and may have something to say about what will happen over the next several weeks and months.
I certainly hope so, because the Mexican government fumbled its way through the first two phases of its crisis and still came out pretty well in the third. I think the U.S. (and many other countries) have likewise been slow in the first two phases of the coronavirus, but I still hope we can thread the needle and bring the crisis under control in the third phase before many thousands more people die or our economy is trashed, or both.
So, I'll lay out what I see as the three phases to a crisis—the buildup, the inflection point and the aftermath—and explain how I think the current crisis maps to what I witnessed in Mexico in the mid-'90s. I'll then describe what I see as the best option for action now, based on considerable reading on the subject, and will provide several links for those who want to dig deeper.
Yes, I'm being speculative, but I figure that it just wouldn't make sense to write about anything other than coronavirus at the moment, and my experience in Mexico is about the only thing I can lob into the discussion: a bit of heavily qualified hope.
The background on Mexico:
When I moved there in 1993, it was the darling of the developing world. Under the leadership of a group of young technocrats, the country was privatizing businesses that had been nationalized under previous, leftist governments. NAFTA was about to be ratified, which could turbocharge foreign investment and modernize the economy—but only if Mexico could maintain the stability of its currency. There had been so many devaluations that earlier in 1993 the country switched to nuevos pesos (new pesos)—I had loads of bills that said they were worth 100,000 pesos, but those were old pesos; you lopped off three zeroes to convert to new ones. Foreign companies liked what they saw in Mexico's leadership in 1993, but they were nervous.
The buildup to the crisis began on New Year's Day of 1994, when some indigenous rebels took control of the capital in the state of Chiapas. The threat escalated in March when the man who had been designated to be Mexico's next president was assassinated. But the Mexican government took a "nothing to see here" approach and did little but talk even as the instability made foreign currency reserves dwindle.
The inflection point came in December, when uncertainty about the newly inaugurated administration exacerbated the pressure on the peso. The government bungled this phase, too. It tried to "widen the band" in which it would let the peso trade, but foreign companies panicked, and hard currency fled the country. Soon, the currency had lost more than half its value. Spooked investors fled other Latin American countries, too.
The aftermath worked out far better, partly because economies tend to be resilient, even when they're as fragile as Mexico's was, but largely because of a $50 billion bailout that President Clinton signed into law in April 1995. The decisive action steadied the ship and gave Mexico time to work things out on its own.
It's that aftermath that gives me hope that the economic package that is being negotiated in Congress (as I write this on Monday, the 23rd), combined with shelter in place orders and increasing production of medical equipment, will let the U.S. not only stop the virus in its tracks but let the U.S. economy survive the enormous hit it is now taking.
But the smartest people I've read on the subject say we have a narrow window in which to get the interventions right and need that steady hand that the U.S. bailout provided Mexico. They say we need to limit interactions quickly enough, severely enough and long enough that we can switch from our "horizontal" attack on the virus to a "vertical" approach before the economy melts down—in other words, going from a thinly spread, nationwide approach to deep dives into local flareups.
For now, we need the horizontal approach, covering everyone, because we simply don't know who has the virus. A key danger with the coronavirus is that many of those who are infected don't show symptoms, and we don't have enough tests available to do a blunt-force check of the population. But if we really all stayed away from each for two weeks, while practicing proper hygiene, we could drastically reduce the number of new cases, resetting the pandemic back to where it was perhaps two months ago.
At that point, we could switch to the vertical approach: watching closely to see where a case appears, then drilling down into it to see how the person got infected and who else had been exposed. Cellphone tracking data is turning out to be very useful in this regard because, once you know someone is infected, you can work backward to see where he was in prior days and get a sense of those with whom he has interacted while infectious (though there are obvious privacy issues). It's also helpful that the virus seems to infect people in clusters—families, those on cruise ships and others who interact with each other repeatedly, rather than just in passing. A vertical approach, based on detailed investigation into individuals and clusters and on extensive testing of all those possibly exposed, would let us shift to treating the coronavirus as a series of small fires rather than as a nationwide conflagration.
The vast majority of people could resume normal activities, and the economy would get rolling again.
But for my optimistic-ish scenario to have a chance, two things have to happen. First, we have to enforce the shelter in place for weeks—in theory, two weeks is enough, but there are enough folks mingling on beaches for Spring Break, etc. that I'm guessing three or four weeks will be needed. (Again, consult experts like Dr. Anthony Fauci et al. for actual data, not the journalist who is self-taught on science.) I worry we may not last three or four weeks because the president already is clearly itching to call an end to quarantines and reinvigorate the economy. Second, we have to produce tens of millions of tests and be able to use them quickly. That means not just having the tests but also having people who can administer them, personal protective equipment for them to wear and lab equipment that can determine results within 24 hours, if not faster. And we may have trouble just ramping up the availability of tests by the time we leave the horizontal phase—the CEO of Roche says that an adequate number of tests is "weeks, if not months, out."
There are loads of apocalyptic economists out there. Over the weekend, I saw big-name economists predicting a 15% to 30% contraction in U.S. GDP in the second quarter, with unemployment as high as 30%. And an economic collapse would trigger massive health problems even if the virus is then contained—more suicides, more homeless, few resources for the poor, etc.
I dearly hope the scariest numbers prove wrong, but I think we're on the knife's edge and need to get everything just right from here.
P.S. (As promised, here are some links: a New York Times article that explains just how harsh the horizontal phase needs to be; a Twitter feed that shows the dramatic effects possible through social distancing; a column in the Times that lays out in detail the horizontal/vertical idea and is where I first saw it; a Tom Friedman column in the Times that builds on the horizontal/vertical notion; a McKinsey article that lays out several possible scenarios, including the one that I'm hoping occurs; and the most optimistic of them all, a Los Angeles Times piece about a Nobel laureate who sees hope in the pandemic numbers even as the grim death tolls keep climbing.)
P.P.S. I didn't want to clutter the main text but thought that those of you who've made it this far might permit me a personal note. That stretch I spent in Mexico was the most important journalism of my career. My little group made the right call during all three phases. We warned readers throughout 1994 that there could be a problem with foreign reserves, making the peso vulnerable. On the day of the "widening of the band," when others took the government at face value, we reported that the peso was going to get slaughtered—and it did, on the first day of trading. Then, when most others went into panic mode, we quickly switched to more optimistic stories because of signs of resilience that we saw.
The Mexico coverage was nominated twice for a Pulitzer Prize, and we were a finalist once.
I even had a Deep Throat moment. Through considerable maneuvering, I convinced a senior official to sneak away from his bodyguard and meet me in secret at my home, even though he was in fear for his life. Trying to defend the government, he spent two hours explaining in detail how the devaluation had looked from the inside, including how it was botched. As we said a friendly goodbye at my front gate, knowing we were unlikely to ever see each other again, a car backfired somewhere in the neighborhood, sounding like a gunshot. He dashed to his car and drove off.